For various reasons, builders simply aren't building enough new affordable homes to keep up with future demand.

Jesseca Chatman stands in front of the brand new 1,584-square-foot home she shares with her husband in the Hillside neighborhood. It's one of the first warm days after a particularly lengthy winter, and the sun only seems to underscore the brightness of her tangerine home.

"We wanted to be the pop on the block," the 30-year-old new homeowner said. "This is what we've always wanted to consider our home. This community."

And the Chatmans are the pop on the block — in more ways than one. The couple bought a home using a city mortgage assistance program called Edge Fund, which is designed to help people with low-to-moderate income buy homes at below-market interest rates. The house, built late last year, is worth more than $200,000. With Edge Fund, the Chatmans got a discount on the price, as well as the lower interest rate.

"We wouldn't have been able to afford to live here because of our income," said Chatman, who works for the Indiana Housing and Community Development Authority. Her husband, Charles, 31, is in medical school at Indiana University School of Medicine. "Every other house is half a million or more."

Buy Photo

Jesseca Chatman and her new home on the 1700 block of Alvord Street in Indianapolis on Tuesday, April 9, 2019. Jesseca and her husband Charles Chatman Jr. used a program called Edge Fund to help them get into the home and neighborhood that they wanted.(Photo: Matt Kryger/IndyStar)

The Chatmans might have found a way to work around their issue, but the study underscores why programs such as Edge Fund are important. In short, the study paints a pessimistic picture for people looking to buy affordable new homes because — for various reasons — builders simply aren't building enough new affordable homes to keep up with future demand.

The demand

For Central Indiana builders to meet employment-driven housing demands, construction would have to increase by 21 percent over the course of the next two decades, according to the housing study, one of two released by MIBOR and BAGI that examined the needs of the region's homebuyers.

One study — a telephone survey of 2,163 adults 18 and older and conducted Aug. 2-26— revealed that people in Central Indiana are largely satisfied with their quality of life. That said, four in 10 people still said they planned to move within the next few years and 62 percent of renters wanted to become homeowners.

Residents leaned more toward suburban and urban communities that offer a mix of houses, offices and shops over residential-only neighborhoods. They also preferred to buy homes within their budgets than those in their preferred location.

The other study — an analysis of Central Indiana's ability to meet its future demand for housing — details how job growth will drive demand for new housing units.The associations project the region will gain 274,576 net jobs over the next two decades.

NEWSLETTERS

Get the IndyStar Business newsletter delivered to your inbox

We're sorry, but something went wrong

The latest in Indianapolis-area business headlines delivered to your inbox.

While such studies might accurately point out a lack of "new" affordable homes, a Ball State economics professor notes that, in truth, Indiana has a housing glut, largely due to older, often vacant homes that are affordable but not necessarily desirable.

Professor Michael Hicks, along with research professor Dagney Faulk,published a study in February disputing the housing inventory shortage in Indiana, and said that new construction would only contribute to Indiana's existing excess housing supply.

"Statewide we have too many homes. Far too many homes that have to be bulldozed and removed," he said. "The problem is that they're not in the places people want to live."

Hicks found 316,000 vacant single-family homes in Indiana.

The real issue, Hicks contends, is that realtors and builders are asking to relax zoning and architectural rules so they can put lower priced-homes in higher-priced communities where it's profitable to sell homes.

"I think what you're really seeing is not a shortage in the housing market," Hicks said. "It's a disagreement between realtors and builders and the communities that are most popular in Central Indiana."

Housing and real estate representatives counter that it doesn't really matter if Central Indiana has a glut of affordable houses if those are houses that sit abandoned because they are in an undesirable location or fail to address the dynamics and needs of the modern family.

The supply

Historical building trends suggest that developers in the region are under-building, on average, 1,750 housing units each year, the MIBOR study shows.

But perhaps more significantly, the homes that are being built are beyond what many people can afford to buy. New households can support homes that cost $260,000 or less, but many new homes are priced above that, the study found.

"People are finding it more and more difficult to find homes within the price range that people can afford," Chris Pryor, MIBOR's senior vice president of government and community relations. "They are finding it difficult to find the type of housing that they are looking for."

To be clear, Central Indiana isn't experiencing an affordability crisis, despite the shortage of new units at the lower and moderate end of the market. The region's housing sector is healthy, and the metro area remains more affordable than other large MSAs across the nation — especially for homebuyers moving from other cities.

Jun Zhu, principal research associate for the Urban Institute: Housing Finance Policy Center and adjunct professor at IU Kelley School of Business in Bloomington, describes the region's housing problem specifically as a supply gap of new construction.

"We don't have enough housing supply," she said, "but in terms of the people who can have enough money to purchase a house, I don't think there's any affordability crisis."

Nevertheless, homes are slightly less affordable than the historical average, according to Attom Data Solutions' first quarter affordability index. The company, which tracks real estate trends and data, also reported that year-over-year median home prices in the Indianapolis-Carmel-Anderson MSA grew faster than wages, rising 10.5 percent to 2.1 percent, respectively.

Pent-up demand from the housing crisis has contributed to a trend in increasing land prices, said John Eaton, a custom home builder with about 25 years of experience in the industry.

Eaton recently sold a home for $750,000 in an area he would never have expected to command such a high value near 38th Street.

"If you had told me that five years ago, I would've told you you were insane," he said. "Before, the rule of thumb, you wanted the lot value to be 20 percent of the house. That's changed lot. Now we're in bigger city prices, some of these lots are 50 percent the value of the house."

The upside, Eaton says, is that rising land prices will spur more development on the eastside and westside of the city. The downside? Those land prices also might keep those new homes from being affordable to entry-level homebuyers or people who currently live in those neighborhoods.

Buy Photo

Fishers Mayor Scott Fadness(Photo: Jenna Watson/IndyStar)

Fishers Mayor Scott Fadness has witnessed valuation surges in his own community. It would be a difficult exercise trying to build a home in Fishers for $200,000 today, even though an affordable home in the city would probably be in the $175,000 to $225,000 range, he said.

The reasons for that mismatch are layered, Fadness said.

He points to a supply-and-demand issue in Hamilton County where land values are being pushed up as more and more people gobble up acres for homes and commercial developments. Fishers, with a population of roughly 90,000, has become a vibrant tech hub in recent years.

According to MIBOR, the median selling price of homes in Hamilton County in February, the latest data available, was nearly $281,000, about 9 percent above the median sales price of homes in February 2018.

Fadness said there's a disconnect when it comes to what affordable housing can mean to a community's long-term sustainability and vision. For instance, when Fishers developed Fishers 2040, its comprehensive plan, one of the concerns that surfaced was how to ensure that neighborhoods remain vibrant 10 to 20 years from now.

"I don't think that anybody from our perspective, from a policy perspective, has an issue with building homes that are lesser dollar value than what we're currently building," Fadness said. "But we haven't seen a product today or concept plan that we would ensure could be a vibrant neighborhood for the next two or three decades."

Furthermore, Fadness said Indiana's tax policy — which caps property taxes—complicates the relationship between cities and developers and builders.

"Currently you have a bit — I don't want to call it a disincentive — but when you talk about making decisions that are in the best financial interest of the city from a long-term sustainability model, there is a question as to what type of housing you should be putting into your community," Fadness said.

BAGI's government affairs director Kate Collins offered a similar explanation, adding that Indiana's property tax caps may have caused some cities to enact architectural standards that aim to drive up housing prices and generate tax revenue. The caps — placed into the state's constitution in 2010 — limit property tax bills to 1 percent of a homestead's gross assessed value, 2 percent on rental and farmland, and 3 percent on business and personal property.

Put another away, while city officials might prefer new housing that meets the needs of all residents, it's simply in the city's financial best interest to build more expensive homes that drive more tax revenue, so long as there is a market for those homes.

"With property tax caps, basically what's happening is you find yourself at kind of an impasse where a builder does come in and shares, 'Hey, we don't think there's a market for these types of homes,'" Fadness explains. "For the first time now mayors and city council members are saying, 'It's not that big of a deal if you don't build any homes because we gain most our money off of commercial development and higher-end homes. Until you're ready to build those in our city, we would rather not do anything to build a home that isn't going to meet it financial need.'"

The effect of politics

If you ask Steve Hatchel, chief business development officer for Indianapolis-based Arbor Homes/Silverthorne Homes, it's harder to build affordable housing in some communities now.

"Four or five years ago, our average price point was right at about $160,000 and now it’s running $215-220,000," Hatchel said. "Big difference."

Arbor Homes caters to the niche market of first-time home buyers. There's a large demand for housing worth between $125,000 and $175,000, he said.

"With the existing market having a very low inventory, anything that comes up in that price point and that's in relatively good shape gets eaten up off the market almost immediately and a lot of times it's at a price higher than the asking price," he said. "…The gap is widening."

Aside from outside pressures such as labor and land costs, which have risen since the Great Recession, Hatchel said, politics also can play a role in where below-market rate housing is built.

Municipalities, builders and the developers can be at odds over what a local housing market needs and what some people would like to see in their communities.

If elected officials have a financial reason to attract more expensive homes to their city, so, too, do the people who elect them. Residents protective over their property values can put pressure on elected officials to not approve higher density, lower cost housing.

The result is thatcommunity regulations on zoning and architectural standards also can make new home construction more expensive, MIBOR and BAGI said.

"Hamilton County is an interesting exercise in the question about affordable housing," Fishers' Fadness said. "I think the comments about zoning restrictions and architectural standards, I think there is some truth behind those restrictions and developers' ability to build exactly what they like versus what the community might see from a vision perspective."

Arbor joined BAGI and the Indiana Builders Association in a lawsuit against the city of Greenwood in 2016 after it implemented new home construction standards the prior year. The rules were retroactive, and the three parties accused the city of implementing stricter rules on elements such as building materials and decorative elements to drive up homes prices.

Support our journalism

The lawsuit, filed in Johnson County, was settled in 2017 with the city agreeing to let Arbor move forward with a project approved prior to the standards passage. Calls to Greenwood officials were not returned,but those new standards are now in effect.

Hatchel said he believes the ability to produce a home at the company's previous price point is nonexistent now unless a home builder goes outside of Indianapolis. If the builder goes too far out, he or she risks running into a lack of utility connections.

Politics needs to be taken out of the process, Hatchel said. Discussions are taking place between cities and builders about how to supplying a diverse housing crop for buyers at all levels.

The shortage of new inventory at the lower end of the market is not unique to Central Indiana. Building permits for privately-owned housing units in March fell 7.8 percent year over-year to 1.26 million, according to U.S. Census Bureau data released Friday.

The National Association of Home Builders said builders across the U.S. are having trouble constructing lower-priced homes as older millennials want to become home buyers and baby boomers downsize.

Fewer buildable lots, escalating land, infrastructure and material costs since the recession, and labor shortages make building low- to moderate- income single-family homes less profitable for builders.

The future

Still, MIBOR and BAGI fear the shortage of new housing inventory could have a long-term adverse impact on the region's workforce and its ability to attract new employers.

Their analysis projects the Indianapolis region to gain a net 274,576 new jobs over the next 20 years, with Hamilton and Marion counties capturing the largest share of job growth. And following economist and University of California, Berkeley, professor Enrico Moretti's thinking on the multiplier effects of new jobs, the analysis notes that for every new job attracted to the region — whether it's in tech or health care — five support jobs are created as well. It's at this level that future workers could be locked out of becoming home buyers, the organizations said.

"Leaders are super-excited to tout the jobs," said BAGI's Collins. "It seems that next step of where are we putting these people isn't part of the conversation."

Both MIBOR and BAGI are advocating for housing to become an integral part of the region's economic development strategy.

"The MIBOR study demonstrated that not only is there a housing shortage, but also that the housing needs for all spectrum levels are not being met," he said. "So it's an opportunity for us to use this information to think more globally about how housing needs are being satisfied."

King Park represents seven neighborhoods just north of downtown, and it's the community development corporation behind Edge Fund, in an effort to allow for more diverse home ownership in its neighborhoods and to avoid future housing shortfalls. Edge Fund is for people who make less than 80 percent of the area median income.

The prediction, Meyer said, isn't unexpected.

"None of it is terribly surprising for those of us who work in the industry," he said. "We've always seen a lack of supply for high-quality affordable housing. I think it is interesting to see projections of what the housing need will actually be. Looking at what we anticipate the need being in 2038 gives us an opportunity to respond in a more proactive way."

And the outcome could change, in part with more programs like Edge Fund, Meyer said. The program, just less than a year old, is funded partially by the city and selected an area called the Monon16 to partner with first.

"The funds that are being used to fund the mortgage, repaid by borrowers, are reinvested back into the area," Meyer said. "It creates a perpetual funding source."

Monon16 includes 70 houses to be built around the area of 16th Street and the Monon Trail. Of those, about 20 will be designated as low or very low income, like Chatman's, and they're dotted throughout the neighborhood, Meyer said.

"It's surprising when you come acrossthe Monon and see 20 brightly colored houses on previously vacant lots," he said. "Monon16 is an example of everything from very low income housing to houses that are $500,000 are all being built next to each other.

IndyHub Executive Director Blake Johnson, who is also a member of the Indianapolis City-County Council, works to attract and connect young professionals in the city. If they're not able to afford to buy a home, it could negatively impact Indianapolis' ability to retain millennials.

"Affordable housing is incredibly critical to why they pick a city to move to," he said.

Still, he was hopeful IndyHub, along with city and state advocates, is doing the right things to connect 20-and-30-somethings to the right resources to stay in the city.

"We are well positioned to remain affordable," Johnson said.

But for the Chatmans, who view themselves as living the American dream, becoming educated on assistance programs opened a door to a market they otherwise wouldn't have been able to touch.

"What does homebuying look like? Who buys a home?" Chatman said. "Everyone assumed, 'oh these houses on this street are so expensive.' But these houses are sprinkled through."

That onus on the buyer, she said, could help Central Indiana avoid the possible-housing shortage. It's just a matter of the buyer bearing responsibility in the future, she said.